8.3 Describe Internal Controls within an Organization

Internal Control Framework

Internal controls should be designed for all areas of the business. Let's examine controls for key areas:

Cash Controls

Cash Receipts Controls:

1. Use Pre-Numbered Receipts

   • All cash receipts recorded
   • Missing receipts indicate problems
   • Sequence can be verified

2. Immediate Recording

   • Record cash immediately upon receipt
   • Don't allow cash to accumulate
   • Daily deposits

3. Separation of Duties

   • Person receiving cash doesn't record it
   • Person recording doesn't have access to cash
   • Different person reconciles

4. Daily Cash Counts

   • Count cash at end of day
   • Compare to records
   • Investigate discrepancies

5. Bank Deposits

   • Deposit cash daily
   • Don't use cash receipts for payments
   • Use checks or electronic payments

Cash Disbursements Controls:

1. Authorization

   • Require approval for payments
   • Different approval levels for different amounts
   • Verify invoices before payment

2. Check Controls

   • Pre-numbered checks
   • Require two signatures for large amounts
   • Limit check signers
   • Secure blank checks

3. Electronic Payment Controls

   • Require authorization
   • Use dual approval
   • Monitor transactions
   • Secure access

4. Vendor Verification

   • Verify vendor exists
   • Verify goods/services received
   • Match invoices to purchase orders

Inventory Controls

Inventory Receiving Controls:

1. Receiving Reports

   • Document all inventory received
   • Verify quantities
   • Inspect for damage

2. Separation of Duties

   • Person receiving doesn't record
   • Person recording doesn't have access
   • Different person pays

Inventory Storage Controls:

1. Physical Security

   • Locked storage areas
   • Limited access
   • Security cameras

2. Inventory Records

   • Maintain accurate records
   • Use perpetual system
   • Regular counts

Inventory Issuance Controls:

1. Authorization
   • Require authorization for removal
   • Document all removals
   • Track usage

Accounts Receivable Controls

Credit Sales Controls:

1. Credit Approval

   • Check creditworthiness
   • Set credit limits
   • Monitor outstanding balances

2. Invoice Controls

   • Pre-numbered invoices
   • Verify prices and terms
   • Send promptly

Collection Controls:

1. Aging Reports

   • Monitor overdue accounts
   • Follow up on overdue accounts
   • Write off uncollectible accounts

2. Collection Procedures

   • Systematic follow-up
   • Document collection efforts
   • Legal action if necessary

Accounts Payable Controls

Purchase Controls:

1. Purchase Orders

   • Require purchase orders
   • Authorize purchases
   • Verify receipt

2. Invoice Verification

   • Match invoice to purchase order
   • Verify receipt of goods/services
   • Check prices and calculations

Payment Controls:

1. Payment Authorization

   • Require approval
   • Verify before payment
   • Pay on time (take discounts)

2. Vendor Management

   • Maintain vendor list
   • Verify vendor information
   • Monitor vendor performance

Luxembourg-Specific Controls

VAT Controls:

1. VAT Rate Verification

   • Verify correct VAT rate applied
   • Track VAT by rate
   • Reconcile VAT accounts

2. VAT Return Controls

   • Review before filing
   • Verify calculations
   • Maintain documentation

eCDF/FAIA Controls:

1. Data Integrity

   • Verify data accuracy
   • Test exports
   • Maintain backups

2. Filing Controls

   • File on time
   • Verify submissions
   • Keep confirmations

Small Business Controls

Challenges for Small Businesses:

• Limited staff (hard to separate duties)
• Limited resources
• Owner involvement in operations

Solutions:

• Owner reviews key transactions
• Use technology (automated controls)
• External reviews (accountant, auditor)
• Rotate duties when possible
• Use pre-numbered documents
• Regular reconciliations

Luxembourg Compliance Note

Luxembourg businesses must implement controls appropriate to their size and complexity:

• Small businesses: Basic controls, owner oversight
• Medium businesses: More formal controls, some separation of duties
• Large businesses: Comprehensive control framework, internal audit

Controls must support:

• PCN compliance
• VAT compliance
• eCDF filing
• FAIA export
• Financial statement accuracy

Think It Through

A small business has only three employees. How can it implement effective internal controls despite limited staff? What controls are most important?

---